In an effort to combat inflation, the Reserve Bank of India (RBI) on Wednesday increased the repo rate by 25 basis points (bps) to 6.5 percent, a move that will result in further increases in lending and deposit rates.
The six-member Monetary Policy Committee (MPC), which is led by RBI Governor Shaktikanta Das, forecast real GDP growth of 6.4% for 2023–2024 at its final meeting of the current fiscal year.
With MPC members Ashima Goyal and Jayanth Varma voting against the increase, the decision to raise the repo rate—the rate at which the RBI lends money to banks to meet their short-term funding needs—was made by a 4:2 margin. Additionally, the rate-setting panel kept its position of “withdrawal of accommodation” to ensure that inflation remains within the target going forward, while supporting growth.
Das stated that even though inflation is predicted to moderate in 2023–2024, it is still likely to exceed the 4% target. “Persistent uncertainties resulting from geopolitical tensions, erratic global financial markets, rising non-oil commodity prices, and erratic crude oil prices have clouded the outlook. At the same time, India’s economy is anticipated to perform well. The system is still adjusting to the rate increases since May 2022. Overall, the MPC believed that additional, calibrated monetary policy action is necessary to maintain anchored inflation expectations, end core inflation persistence, and thereby improve medium-term growth prospects. As a result, the MPC chose to increase the policy repo rate by 25 basis points to 6.50 percent,” he said.
The RBI has raised interest rates six times in a row.
This results in a 250 bps increase in the repo rate for the current cycle. The RBI increased the repo rate by 35 basis points at its most recent policy meeting on December 7 as opposed to 50 basis points in September 2022.
We now have room to evaluate the effects of the actions taken thus far because we have slowed down the pace of hike — from 50 bps in September 2022 to 35 bps in December 2022 to 25 bps today. It is an ongoing exercise, and we will continue to evaluate it and make the appropriate decision as we move forward, said Das.
After reaching a peak of 7.8% in April 2022, the CPI inflation fell below the upper tolerance level of 6% in November and December 2022, driven primarily by a sharp drop in vegetable prices.
According to Das, the MPC will continue to keep a close eye on how the inflation outlook is changing in order to make sure that it stays within the tolerance range and gradually approaches the target.
Dinesh Khara, the chairman of State Bank of India
commented on the policy, saying that the RBI policy statement reaffirmed the commitment to further reduce inflation and ensure market financial stability. the RBI coordinates key measures to cushion the economy as much as possible from the effects of inflation on daily life.
Regarding the transmission of the repo rate, Das stated that during the current tightening cycle, the pace of transmission of monetary policy actions to lending and deposit rates has improved.
Between May and December 2022, the weighted average lending rates (WALR) on new rupee loans and outstanding loans increased by 137 basis points and 80 basis points, respectively. Fresh deposits and outstanding deposits both saw increases in the weighted average domestic term deposit rate of 213 basis points and 75 basis points, respectively. Das anticipates that the current account deficit (CAD) will decrease in the second half of the fiscal year 2022–2023 and remain within viability’s acceptable range.
CAD was 3.3% of GDP during the first quarter of the current fiscal year.